Incentives versus Transaction Costs: A Theory of Procurement Contracts

Topics:
Ordering Systems
Tags:
Business Operations,
Contract,
Incentive,
Procurement,
Purchasing & Procurement,
Sales,
Sales Force Management,
Social Science Electronic Publishing Inc.,
Theory
Source:
Social Science Electronic Publishing

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Overview: Inspired by facts from the private sector construction industry, we develop a model that explains many stylized facts of procurement contracts. The buyer in our model incurs a cost of providing a comprehensive design, and is faced with a trade-off between providing incentives and reducing ex post transaction costs due to costly renegotiation. We show that cost plus contracts are preferred to fixed price contracts when a project is more complex. We briefly discuss how fixed-price or cost-plus contracts might be preferred to other incentive contracts. Finally, our model provides some micro-foundations for ideas from Transaction Cost Economics.

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Format: HTML | Date: Apr 2001 | Pages: 1

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